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INSEE expects a moderate recovery in activity in 2019

However,this description of the French economy raises a number of questions.1 – The 2019 growth projection of 1.7% outlined in the French finance bill needs to be reviewed: if the 1H 2019 figure of 0.35% persists right throughout the year, then average annual growth would come to 1.3%, so we would need to see 0.9% per quarter in the second half of the year if we are to achieve 1.7%. This looks overly ambitious in light of the current international backdrop.This also means that the public deficit figure would be well above the 2.8% initially slated, and that’s before taking on board the recent announcements by the French President, so 3.5% looks like a more reasonable expectation.2 – The international outlook is lackluster in Europe and worldwide. Growth isslowing and both the political climate and trade outlook are deteriorating, soit looks unlikely that we will see strong impetus from the rest of the world,and this means that foreign trade is set to make a negative contribution to growth.3 – Household consumer spending is poised to take a clear upturn, driven by the effects of purchasing power in the first half of the year. According to INSEE’s calculations, disposable income-based purchasing power should increase considerably with carry-over of 2% at the end of the first six months of the year, as compared with 1.4% in 2017 and 2018.This additional boost should quickly help household spending catch up again. This virtuous momentum assumes that there will be no carry-through effects from the seen in December into the first weeks of 2019, and also implies that households’behavior reacts primarily to changes in their purchasing power. INSEE’s projections reflect that households have so much additional purchasing power that they spend more and also save more. However, the more worrying point here is that household confidence as measured by the monthly INSEE survey suggests that consumers are gradually becoming more and more pessimistic, which is why the recovery in spending is not spectacular but could still be a bit too strong.4 – Alongside this modest recovery is a very moderate job profile, with 2019 momentum set to follow on in the same vein as 2018, but a far cry from the recovery staged in 2017, when 341,000 jobs were created, followed by only 107,000 in 2018 and a similar figure in 2019. So we should not expect jobless numbers to decrease.

5 – Companies accommodated the shock in the last quarter of the year by keeping their investment flat. However, capex is set to recover right from 1Q 2019 at 0.6% per quarter, which is a bit slower than the pace in 2017 and 2018 (apart from the last quarter) but still solid in view of the frailer international context. Companies are sticking to their guns, despite a more sluggish international context, so we are seeing something of a virtuous catch-up move from French companies, which should be welcomed.This may look somewhat excessive as it implies that companies fail to persevere,yet they are worried if we look at economic surveys and capital goods orders,which are highly correlated to investment. The chart below suggests that companies may have put the brakes on investment to a greater extent than INSEE expects in the last quarter. I will be keeping a close eye out for the December indicator,to be published on 21st, and hope that it will correct this sharp swift drop in November.

The other point worth noting is that margins for non-financials should return to their 1985-2007 highs next year. Corporate profitability is to surge due to the drop in employer contributions. The adjustment for companies was severe after the 2008/2009 financial crisis, but judging by this margin indicator, this is now in the past. In other words, value-added was shared out in a relatively stable way from 1985 to 2007, it then distorted severely during the crisis to the benefit of employees and to the detriment of companies,but in 2019 it is set to return to pre-crisis levels and close to all-time highs (33.5% vs. peak of 34%). The impact of automatic stabilizers that maintained positive conditions for households is now in the past (see here – text in French only).